A Classic Impulse Wave in General Electric

Explore the rules, guidelines and Fibonacci multiples of impulse waves

Impulse waves are an integral part of the Wave Principle. Understanding their
rules, guidelines and Fibonacci multiples will improve your application and
your ability to identify high-confidence trade setups.

There are three rules that govern impulse waves:

wave two may never retrace more than 100% of wave one;

wave three may never be the shortest impulse wave of waves one, three
and five. It does not have to be the longest, but it may never be the shortest;
and

wave four may never end in the price territory of wave one.

Fibonacci multiples are the mathematical basis used to identify wave objectives.
For example, we often tend to see a deep retracement in wave two. A .618 multiple
of wave one and .382 multiple of wave three are the most common Fibonacci
retracements for second and fourth waves. Fibonacci extensions for waves three
and five include .618, 1.000, 1.618, 2.000 and 2.618.

For example in this 120-minute price chart of GE, we have an initial move
to the downside. Notice the deep retracement in wave 2 - we go back to beyond
the .618 retracement at 22.89.

From there, we see a wave three decline followed by a fourth wave bounce --
a correction -- back to the .382 retracement of wave three at 21.78.

The most common Fibonacci retracement for a fourth wave is a .382 multiple
of wave three.

The most common Fibonacci retracement for a second wave is a .618 multiple
of wave one.

You may notice another extension, or multiple, on this price chart coming
in at 21.06. At that level, wave three equals a 2.618 multiple of wave one.

Within the structures of an impulse wave (or in corrections, for that matter),
each wave of the pattern is going to have some type of Fibonacci multiple
or ratio to prior waves within the structure.

One of the most relevant guidelines pertaining to impulse waves is that when
an impulse wave completes, a correction occurs that pushes prices back into
the span of travel of the previous fourth wave (most often ending near its
terminus).

If we apply this to GE, you can see how it works:

When we finished the 5 wave decline, it set the stage for a countertrend move
back up to the previous 4th wave extreme.

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This article was syndicated by Elliott Wave International and
was originally published under the headline A
Classic Impulse Wave in General Electric. EWI is the world's largest
market forecasting firm. Its staff of full-time analysts led by Chartered
Market Technician Robert Prechter provides 24-hour-a-day market analysis to
institutional and private investors around the world.

Robert Prechter, Chartered Market Technician, is the founder
and CEO of Elliott Wave International, author of Wall Street best-sellers Conquer
the Crash and Elliott Wave Principle and editor of The Elliott Wave Theorist
monthly market letter since 1979.

Elliott Wave International (EWI) is the world's largest
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